1. Capital Gain utilised for purchase of residential property before the date of filing return under section 139(4) – Eligible for exemption under section 54

CIT vs. Rajesh Kumar Jalan [2006] 286 ITR 274 (Guwahati)

The assessee had sold his share in a residential property “Jalal House” for a consideration of Rs. 40,00,000/- The indexed cost of the property was worked out at Rs. 10,26,925/- and thus, there was a capital gain of Rs. 29,73,048/- earned by the assessee. The assessee had decided to purchase another residential property situated at Bally High, 1, Ballygunge Park Road, Kolkata, from the sale consideration received. As per the two agreements dated 9th May, 1996 and 17th May 1996 between the assessee and the two co-owners of the said residential property, the assessee had purchased the said residential property for a consideration of Rs. 30,00,000/-. The assessee had claimed exemption under section 54 on the entire capital gain on the sale of house property.

The Assessing Officer had rejected the claim of the assessee on the ground that the assessee had merely taken sub-lease of the property, by deed of indenture dated 17th January, 1988 and that the assessee had not complied with the provisions of section 54(2) of the Act by not depositing the unutilized portion of capital gains in a capital gains account before the due date for filing returns under section 139(1) of the act.

The assessee being aggrieved by the said order preferred an appeal. The first appellate authority had partly allowed the appeal by holding that even a lease amounts to a transfer within the meaning of Transfer of Property Act, 1882. The CIT(A) allowed relief in respect of the sum of Rs. 14,43,254/- which the assessee had utilized before 31st August, 1996 for the purchase of the property and refused exemption on balance amount of Rs. 15,29,794/- The assessee as well as the revenue aggrieved by the above order preferred appeals before the Tribunal. The Appellate Tribunal dismissed the appeal filed by the revenue and allowed the exemption on the full amount of the capital gains.

The Department carried the matter before Hon’ble High Court. The Hon’ble high court dismissed the appeal by observing that as per the provisions of section of 54(2) the unutilized portion of capital gains on the sale of residential property should be deposited before the due date of furnishing the return of income under section 139 of the Act. Hon’ble High Court further observed that section 139 cannot mean only section 139(1) but it means all sub-sections of section 139. Under sub-section (1) of section 142 any person who had not furnished a return within the time allowed under sub-section (4) of section 142 may furnish the return for any previous year at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment whichever is earlier. In the instant assessee’s case return for the assessment year 1996-97 could be furnished before the expiry of one year from the end of relevant assessment year or before the completion of the assessment, whichever is earlier, under sub-section (4), he was entitled to fulfil the conditions for exemption under section 54 up to March 30, 1998. Hence the assessee was entitled to exemption under section 54 on the entire capital gain on the sale of residential property.

2. Income of the minor under trust being accumulated till his majority – Cannot be added in the hands of parent u/s. 64(1)(vii)

CIT vs. (1) K.J. Ramaswamy (2) K.J. Seetharaman [2006] 286 ITR 77 (Mad) [FB]

The assessees before Hon’ble High Court, Ramaswamy and Seetharaman, are brothers. The minor children of the assessee were beneficiaries of trust of which the assessees were the founder-trustees. The assessees became partners in a firm in a representative capacity, as trustees of the trust. The Assessing Officer had added the income received in the representative capacity from the hands of the respective parents of beneficiaries under section 64(1)(iii) of the Act read with Explanation 2A thereto.

Being aggrieved by the above order the assessee had filed an appeal with the CIT(A). The first appellate authority had observed that the income accrued to the benefit of the minor children was allowed to accumulate and the accumulated amount was added to the fund of the trust till the minor attains the majority. Therefore, the income from representative capacity of firm cannot be included in the hands of the respective parents of beneficiaries. The Hon’ble Appellate Tribunal upheld the order of the CIT(A).

The Hon’ble High Court dismissed the Revenue’s appeal with the observation that to attract section 64(1)(v) (now 64(1)(vii)) of the Act, it must be seen that the income generated from the transferred assets is available for the immediate or deferred benefit of the persons mentioned in that sub-section. In Explanation 2A, the phrase used is “for the benefit of the minor child”. This means that the minor should have the benefit of the income. In other words, the income must be readily available for the use of the minor. If the income is only to be credited to the minor’s account in the trust and to remain there till the minor attains majority, then, it is not for the immediate use of the minor, which means that the minor does not get any benefit at all for the present. He is not entitled to receive the money till he attains majority. So long as it is shown that the beneficiary / minor child of the individual has to receive his share of income only on attaining majority, clause (iii) to section 64(1) of the Act would not be attracted.

3. Continuance of business by outsourcing the manufacturing activity after sale of manufacturing unit losses can be carried forward and set off

CIT vs. Amarsinghji Mills Ltd. [2006] 286 ITR 129 (Guj)

The assessee company was manufacturing cloth from yarn and then selling the same in the market. During the year under consideration the entire textile unit was sold. The assessee claimed in its return of income carry forward of the earlier years losses and set off the same against the profit of the current year. The claim was rejected on the ground that the assessee started a new business of purchasing grey cloth from the market, sending it for processing and after having it processed selling it in the open market. Therefore, the assessee was not entitled to the benefit of carrying forward and set off of the accumulated losses pertaining to the textile unit which was sold off. The assessee preferred an appeal before CIT(A). However, the first appellate authority confirmed the Assessment Order. The Appellate Tribunal accepted the contention of the assessee and allowed the appeal with the observations that the assessee was having common management and common control of business, allowed the assessee to set off the loss which had been carried forward.

Section 72(1)(i) of the Act stipulates that if the net result for the computation under the head “Profits and gains of business or profession” is a loss, the whole loss can be carried forward to the following assessment year and shall be set off against the profits and gains of any business carried on by the assessee and assessable for the subsequent year. The proviso thereafter imposes a further condition to the effect that the business for which the loss was originally computed continues to be carried on by the assessee in the previous year relevant for the following assessment year.

The Appellate Tribunal has recorded that finding of fact the assessee was having common management and common control of business, that there was no difference in the business carried on by the assessee. Thus, the assessee was entitled to the benefit justified of carry forward and set off of accumulated losses.

4. Interest on the trade debtors is eligible for deduction u/ss. 80HHC and 80-I.

CIT vs. Indo Matsushita Carbon Co. Ltd. [2006] 286 ITR 201 (Mad)

The assessee claimed relief on interest on overdues from trade debtors under sections 80HH and 80-I. The Assessing Officer while passing the assessment order disallowed the same on the ground that the interest was not derived from industrial activity. The assessee preferred an appeal before the CIT(A). The first Appellate Authority confirmed the Assessment Order. Being aggrieved by the order of the CIT(A) the assessee preferred an appeal to the Appellate Tribunal. The Appellate Tribunal set aside the order of the CIT(A) holding that the trade debtors are derived only from the industrial undertaking and hence they are to be considered for claiming the deduction under sections 80HH and 80-I.

The matter was carried before the Hon’ble High Court. The Hon’ble High Court observed that it is settled law that there can be no doubt that the interest earned on the belated payment would, however, be directly relatable to the business of the assessee of forgings. If the purchasers of the forgings did not make the payments for the forgings and then agree to pay the interest on the delayed payments, the said interest would have direct nexus with the business of forgings. The Hon’ble High Court further observes that the true test would be whether such interest would be available to the assessee otherwise also. The answer to the question would be certainly in the negative. The interest being directly relatable only to the amounts receivable by the assessee during the course of its business on amounts of the sale of forgings, this interest would have to be included as the profits and gains derived from the business of the assessee.

5. Deduction under Chapter via are allowable while computing undisclosed income for the block period

Eastern Produce Co. vs. ITO [2006] 286 ITR 353 (Mad.)

The assessee before the Hon’ble High Court was a partnership firm engaged in the business of dealing in musical instrument was subjected to proceedings under section 158BD on the basis of a statement one of the partners during the search proceedings against him u/s. 132(1). It was detected that the assessee had exported musical instrument. But these transactions are not recorded in the regular books of account. The assessee computed the undisclosed income in response to the notice u/s. 158BD and claimed deduction u/s. 80HHC.

The Assessing Officer completed the assessment by including the undisclosed income. While completing the assessment, the AO disallowed the deduction claimed under section 80HHC and estimated the income on the basis of the other assessee doing the same business of exporting musical instruments.

Aggrieved by the order of the AO, the assessee preferred an appeal with the CIT(A). The first appellate authority confirmed the order of the AO. Aggrieved by the order of the CIT(A) the assessee went on appeal to the Appellate Tribunal. The Second Appeal of the assessee was also rejected.

On the ground that the Explanation to section 158BB of the Act indicates that the total income and loss of each of the previous year shall be that total income or loss as computed without giving set off of brought forward loss under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32. There is no mention about deduction under section 80HHC of the Act. Thus, the claim of the assessee was rejected. The Appellate Tribunal failed to consider the amendment brought through Finance Act, 2002

The matter was carried on by the assessee before Hon’ble High Court and the Hon’ble High court observed that the Tribunal had not considered the amended provision of law. Thus, the claim of the assessee was to be examined by the Appellate Tribunal in the light of amended provision.

6. Owner-substitution of the same in the Co-operative Housing Society the income under the head house property not assessable

Ram Saran Das Tandon vs. CIT 2006] 286 ITR 419 (All.)

The assessee became a member of a housing society. The assessee constructed the house in 1957-58. The assessee had applied to the society for substitution of his wife’s name in the record of the society in place of his name. After completion of necessary formalities the name of the assessee’s wife was substituted. The assessee received a consideration towards investment made in getting allotment of the land and construction of the house. The assessee did not disclose the income from the house property in his return of income. The Assessing Officer while finalizing the assessment order included the consideration received on account of the investment made in getting allotment of the land and construction of house in the computation of income of the assessee.

The assessee being aggrieved by the assessment order passed by the AO preferred an appeal to the CIT(A). The first appellate authority allowed the appeal of the assessee and deleted the additions made by the AO. The department being aggrieved by the order of the CIT(A) preferred an appeal to the Appellate Tribunal.

The matter was carried by the assessee before Hon’ble High Court and the Hon’ble High Court observed that under section 27(iii) of the Act a person who is a member of the co-operative housing society to whom a building or part thereof. As the assessee ceased to be a member of the society in the year 1975 and in his place his wife become a member of the society, the house property in question belonged to his wife and not to the assessee. The income from the property was not assessable in the assessee’s hands.

7. A. Revision – Order must be erroneous and prejudicial to revenue – Mere prejudice to revenue not sufficient

B. Investment allowance –Assessee manufacturing concrete piles is eligible

Simplex Concrete Piles (India) P. Ltd. vs.CIT [2006] 286 ITR 470 (Cal.)

The assessee engaged in the business of manufacture of concrete piles claimed benefit of investment allowance u/s. 32A. The claim was accepted by the A. O. The Commissioner issued show cause notice u/s. 263 to exercise revisional jurisdiction to set aside the Assessment Order. The show cause notice was challenged in a Writ Petition.

The Hon’ble High Court disposed of the Writ Petition holding that the provisions of section 263 of the Act, cannot be invoked to correct each and every type of mistake or error committee by the Assessing Officer. It is only when an order is erroneous. If due to the erroneous that the section will apply and an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. If due to the erroneous order of the Income-tax Officer, the Revenue is losing tax lawfully it will be prejudicial to the interest of the Revenue. The phrase “prejudicial to the interest of the Revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer. Ever loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the Revenue.

The Hon’ble Court on merits held that production and manufacturing process means putting in raw materials and emergence of a new thing. The concrete piles were done with a process of mixing and with the process a third article emerged and this was by way of a chemical process as the finished product could not be converted back to the inputs and this finished product was used for other purposes.